By: Steve Smith
After steep declines these four restaurants stocks are approaching support levels.
A confluence of factors, from an improving job market and low gas prices, to the notion people were spending on “experiences over things”, were supposed to be a boon to restaurants. Yet despite higher wages and prices at the pump staying near multi-year lows for the better part of the past 18 months, the shares of companies across the restaurant sector, from fast food to high end steak houses, not only failed to outperform during the first part of the year but have suffered a near collapse of late.
In fact, of the 49 publicly listed chains with a market cap of over $50M more than half the sector is showing a negative YTD return, despite a steady 6% return for the S&P 500 Index.
The latest blow came on Wednesday when hamburger chain Sonic (SONC) issued a warning its fourth quarter earnings would come in lower than expected, sending shares down some 7% to $25.40, just above its 52-week low. Wednesday also saw sandwich shop Cosi (COSI) finally put itself and its shareholders out their long time suffering by declaring bankruptcy.
So what wrong and is it time to scrounge for some tasty buy opportunities?
Two of the biggest drags on the sector come from issues that cut both ways; the increase in wages, especially at the lower end of the pay scale puts more money in consumers’ pockets but also increases chains number cost. Higher payroll has more than offset the lower input costs of low raw food prices on everything from proteins to grains.
In fact, the low cost of food has made eating out to an all-time high relative to eating at home.
Food deflation has also destroyed shares of supermarkets such as Kroger (KR) and Supervalu (SVU) which already operate on razor thin margins. But that’s a disaster for another day.
Lastly, people seem to simply have food fatigue of all the best known chains and are opting for the local ‘mom & pop’ location that offers that ‘artisanal’ experience that millenniums value so highly.
But the beat down is getting severe and valuations are becoming attractive; let’s scroll through some charts and see if anything looks appetizing.
1. Jack-in-the-Box (JACK) which had been a star performer as it Qdoba Mexican Eats stole share from beleaguered Chipotle (CMG) seems to have run out of steam with a double top near the $102 level. I’d now look to see if support will hold near the gap at the $95 level.
2. Buffalo Wild Wings (BWLD) since hitting an August high of $173 shares have slid some 25% in just the past two months, and are down over 45% from all-time high. It failed to hold support at the $150 level but has a secondary level near $142. With the seasonal strong college and pro football seasons kicking into gear this could be a good area to start nibbling from the long side.
3. Texas Roadhouse (TXRH) brings us a little higher on the food chain in terms of price point but it too has seen shares slide 20% since the summer highs despite a steep decline in beef prices. Shares are now at key support near the $40 level.
4. McDonald’s (MCD). The good old golden arches. I think this standard bearer of burgers will prove the test of time for its broad appeal, newly streamlined menu and value oriented approach. People are starting to appreciate that when they want fast food MCD is a reliable old friend. Shares are near important support level at the $114 level.
In all cases I’d be patient and wait for the attractive risk/reward entry points near support levels. And of course I’d use options to limit my risk and leverage my upside potential.